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Puerto Rico Capital Market Reform


June 29, 2000
Copyright © 2000 CARIBBEAN BUSINESS. All Rights Reserved.

A significant portion of the wealth generated by the economy of Puerto Rico leaves the island.

"The objective of developing a native capital market is to retain at least some of that capital outflow. Its contribution would be important to enhance the self-productive capacity of the island economy. By keeping this goal in mind and by increasing the implementation of additional financial investment vehicles, the economy should be able to reinvest part of that capital outflow locally, which in turn would lead to the expansion of the economy from within", Rep. Angel Cintron told CARIBBEAN BUSINESS.

According to the Foundations and Dynamics for future Growth a publication of the Government Development Bank for Puerto Rico (GDB), the development of a native capital market should be based on three interrelated fundamentals. It should be:

  • Directed to promote an integrated network of business firms, activities, and markets so that the economy can achieve greater linkages that are mutually supportive.
  • Directed to stimulate savings and domestic investments through an efficient capital market and appropriate fiscal policies.
  • Directed to provide a support structure for the promotion of key economic activities including exports.

Within that policy framework in the past few years, the government has implemented several initiatives with the purpose of stimulating the development of a private equity industry in Puerto Rico, by diversifying the number of financial investment instruments available to investors. These initiatives can be grouped as follows:

Incentives to attract venture capital investment. In 1996, the Puerto Rico Development Fund, a subsidiary of the GDB, created the Guayacan Group Inc. This group established two separate capital funds with private and public money. These are:

  • Guayacan Fund of Funds L.P. appeals to pension funds looking to diversify their investment strategies.
  • Guayacan Private Equity is in charge of developing a substantial venture capital/private equity market, funded with public and private money to capitalize business in Puerto Rico.

Tax reform:

  • Inheritance Tax. In 1986, the tax on inherited capital invested in Puerto Rico was eliminated, while a 20% tax rate remains on assets invested outside the island.
  • Tax on Imported Capital. The 1994 tax reform eliminated the 29% tax on interest income earned by non-Puerto Rico financial institutions on loans made in Puerto Rico.
  • Dividends. The 1994 tax reform also cut to 10% the tax on dividends paid by local companies.

The Capital Reform Act of Puerto Rico (Law 42 of 1997):

  • Reduced from 20% to 7% the tax rate on long-term capital gains on the sales of publicly traded local stock.
  • Cut the tax on certain eligible debt from 39% to 17%.
  • Imposed a 17% tax on mortgage backed securities guarantees by the federal Government National Mortgage Association (GNMA).

Real Estate Investment Trust (Law 25 of 2000):

  • The law provided the basis for REITs to manage investment portfolios in shopping centers, medial facilities, nursing homes, apartments, office buildings, and other real estate holdings.

Employee Stock Ownership Plans.

  • In 1998, the legislature approved ESOPs to give employees a share in business and generate capital for companies.

International Banking Act.

  • In 1989, Puerto Rico enacted a statue to attract major international financial services companies to the island.
  • In 1996, the Act was specifically amended to promote deregulation and free international banks from unnecessary restrictions.

Capital Market Outlook

Besides those already mentioned, there are other initiatives under way.

Board of Trade:

  • The Chicago Board of Trade is looking to set up branches outside the continental U.S., and Rep. Angel Cintron is lobbying them to select Puerto Rico.

Asset Management:

  • The GDB is working on a plan to support the development of a strong local asset management market. Within the next two months, the GDB will select four local assets managers to administrate between $50 million to $100 million from government retirement fund portfolios.

IPOs for Small Business:

  • An industry proposal calls for legislation to provide for holding companies that can issue publicly traded stocks and channel proceeds to companies too small to do it alone.

This Caribbean Business article appears courtesy of Casiano Communications.
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